Working Paper: CEPR ID: DP8501
Authors: Jan Boone; Christoph Schottmüller
Abstract: Standard insurance models predict that people with high (health) risks have high insurance coverage. It is empirically documented that people with high income have lower health risks and are better insured. We show that income differences between risk types lead to a violation of single crossing in the standard insurance model. If insurers have some market power, this can explain the empirically observed outcome. This observation has also policy implications: While risk adjustment is traditionally viewed as an intervention which increases efficiency and raises the utility of low health agents, we show that with a violation of single crossing a trade off between efficiency and solidarity emerges.
Keywords: health insurance; risk adjustment; single crossing
JEL Codes: D82; I11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher income (D31) | lower health risks (I12) |
| lower health risks (I12) | higher levels of health insurance coverage (I13) |
| higher income (D31) | higher levels of health insurance coverage (I13) |
| income differences (D31) | systematic relationship between health status and insurance coverage (I13) |
| market power among insurers (G22) | high-risk individuals receive less insurance coverage (G52) |